Exxon production drop takes shine off profits

Exxon Mobil is producing less crude oil to be processed at refineries like its giant Baytown, Tex., complex, but refining result exceed expectations in the third quarter.

SAN FRANCISCO (MarketWatch) — Exxon Mobil Corp.’s third-quarter report may have topped Wall Street profit estimates, but it also has analysts worried about the company’s declining oil and natural-gas production.

Upstream production at Exxon
XOM, -0.74%
is hovering at its lowest level in three years. The company’s total third-quarter production fell 7.5% year-on-year, fueling speculation it could resort to a large acquisition to jump-start production.

Exxon’s profit for the quarter fell 7.4% on lower output volumes and softer oil and gas prices. The world’s largest publicly traded company reported profits of $9.57 billion, or $2.09 a share, down from $10.33 billion, or $2.13 a share, a year earlier.

Analysts polled by FactSet had expected profits of $1.95 a share.

“This was not a high-quality [estimate] beat,” said Pavel Molchanov, an analyst with Raymond James. “Production has yet to stabilize and that is not encouraging.”

Molchanov predicted Exxon’s output would fall 5% in 2012, more than for most other global oil and gas companies.

Exxon’s production was lower than most analysts expected and has been nearly stagnant since 2010, when it acquired natural-gas producer XTO Energy for $31 billion. The acquisition catapulted Exxon to the No. 1 spot as a natural-gas producer in the U.S., but some say it hasn’t lived up to its promise.

Exxon made another foray into shale natural gas and unconventional sources of oil and gas with the $2.6 billion acquisition in October of Calgary-based Celtic Exploration Ltd.
CA:CLT
the largest since XTO and one that brought to Exxon’s portfolio more than half a million acres of shale formations rich in natural gas and oil.

Exxon certainly has pockets deep enough for more acquisitions if needed. It ended the quarter with $13.3 billion in cash and cash equivalents, slightly more than the gross domestic product of Albania, and $12.4 billion in debt. And, for a company its size, its recent purchases have been small. Oil and gas M&A activity picks up.

Exxon is a pricey stock among major oil companies, valued at nearly 10 times earnings compared with price-to-earnings ratios of 6.9 for ConocoPhillips
COP, -2.72%
8.2 for Chevron Corp.
CVX, -1.80%
and a sector average of 8.4.

Exxon shares have gained nearly 17% in a year, compared with single-digit gains for Conoco and Chevron and losses for Royal Dutch Shell
RDS.A, -2.10%
and BP PLC
BP, -1.83%

In a conference call after the earnings announcement Thursday, David Rosenthal, vice president of investor relations, called the lower production numbers a “slight underperformance” due to downtime mostly on North Sea fields, but in line with the company’s expectations.

When asked about future M&A activity, Rosenthal offered the usual reply that there’s no limit on the resources or location of a potential target. “We pursue all the attractive opportunities that are out there,” he said.

Rosenthal declined to be more specific, saying updates will be provided in March.

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One of the benefits of the XTO acquisition was to combine its expertise with Exxon’s technology “to better analyze what‘s out there,” Rosenthal said. Exxon would also be interested in potential “synergies” like contiguous production properties, he said.

For Exxon, its better-than-expected results in refining and marketing and chemicals, as well as its lower cost of doing business, “more than offset the impact of lower [exploration and production] results,” analysts at J.P. Morgan said in a note.

Such results “underscore the benefits of an integrated business model,” they said.

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